Long-awaited changes to the California Environmental Quality Act have resulted in some progress for developments under review. But two months after the rule changes, developers in Southern California say there are still plenty of hurdles to project completion.
Macroeconomics and persistent market uncertainty, combined with the severity of the state’s housing crisis, remain roadblocks for development even after crucial exemptions to CEQA were signed into law.
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“I think the big obstacle right now is, even if you have a project that would qualify under the legislation, do the economics still make sense right now?” land use attorney and partner at Venable LLP Bill Sloan said.
Developers are calculating how economics factor into new projects as they consider how to take advantage of the new rules, Sloan said.
Commercial construction costs are on the rise nationally, and San Francisco and Los Angeles are the second and third most expensive construction markets in the country, respectively.
These cost considerations, along with interest rates and tariffs, are among the factors throttling what might have been robust activity from the rule changes in the short- to medium-term.
While some projects are benefiting from the new rules, they are typically those that were already in progress before CEQA was amended. One of the most closely watched exemptions applied to certain residential projects no larger than 20 acres in urban infill areas.
“This law came around, and it made all the difference in the world,” Cedar Street Partners Managing Partner Jonathan Curtis said. Cedar Street was developing a housing project in La Cañada Flintridge that wrapped up about two years of litigation in March. “We pivoted to this exemption, [and] the city has acknowledged this exemption because it is so crystal clear as far as what the criteria are.”
Curtis anticipates that one of the effects of the exemption will be that more small and medium-sized developers will have barriers to entry slightly lowered because of the time savings of not having to go through CEQA review.
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Shortened timelines might make projects more financially feasible, allowing them to consider and execute projects they would have ruled out without the exemption.
Not every project can use this exemption, but for those that qualify and want to take advantage of it, “it’s fantastic,” said Holland & Knight partner Ryan Leaderman.
Still, a few details around certain parts of the new rules need to be ironed out. For example, developers are required to do a tribal consultation, and the timeline for that, as well as other details, have yet to be articulated, Leaderman said.
Project Management Advisors Vice President Sonnet Hui is working with some clients who have projects that did not previously contain residential elements who are now considering a mixed-use pivot to take advantage of getting to sidestep CEQA.
However, even those who decide to pivot are still not taking the necessary next steps to build their projects.
“We're not seeing execution yet because I think a lot of developers are still waiting for and anticipating that the interest rates are going to come down,” Hui said.
The Trump administration and appointees have been after the Federal Reserve for months to cut the benchmark interest rate. Investor confidence has risen that cuts are on the way.
People who criticized these bills when they moved through the legislature have maintained that these CEQA tweaks will not, on their own, help to lower the high cost of housing in California. That is an issue with numerous contributing factors, including stagnant wages, rising rents, the high cost of land and the rising cost of construction.
Others have said that although these CEQA reforms will save time for developers, they might not necessarily result in more development.
“It’s not the CEQA costs that are holding up housing,” Mark Rhoades, a Berkeley-based planning and development consultant, told CalMatters in July.
“I don’t think this is going to make more development happen,” he said, speaking of the exemption bills. “It’s going to make development that is already happening a little easier.”
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